The financial health of Canadian pension plans has shown slight improvement in the second quarter of 2024, according to the latest index from Normandin Beaudry.
As of June 30, 2024, the average funded ratio of pension plans stands at 126%, reflecting a two percentage point increase from the previous quarter and a nine percentage point increase since the start of the year. This ratio, which excludes the effect of asset smoothing, indicates that pension plans are now better funded than they were earlier this year, it said.
The solvency ratio of these plans also saw a minor rise, reaching 114%, which is up one percentage point from the last quarter and four points from the beginning of the year. This improvement is attributed mainly to the reduction in pension plan actuarial liabilities, driven by higher discount rates.
Impact of interest rate cut
The Canadian financial market context played a significant role in these changes. On June 5, Canada became the first G7 country to reduce its key interest rate, lowering it by 0.25% to 4.75%.
This rate cut, the first since March 2020, was followed by similar actions from other central banks, including the European Central Bank. Despite this, long-term interest rates edged higher during the quarter, resulting in negative yields for bonds with longer maturities.
Equity markets experienced more subdued returns compared to the first quarter, with sectors like technology, telecom, and utilities maintaining positive returns, while other sectors generally saw negative results. Real estate investments have started to stabilize after a challenging 2023, and infrastructure investments continue to meet expectations.
Life expectancy increasing faster than expected
In addition to market performance, pension plan administrators are paying close attention to new developments in longevity trends. In April, the Canadian Institute of Actuaries (CIA) released a new mortality improvement scale that suggests life expectancy will increase faster than previously expected. This could lead to higher-than-anticipated costs for pension plans.
Pension plan administrators are advised to prepare for potential impacts by considering strategies such as adding a margin to the discount rate, transferring longevity risk through insured annuity contracts, or consulting with advisors on risk management best practices, it said.
Key figures from the Normandin Beaudry Pension Plan Financial Position Index indicate that while there has been slight progress, ongoing monitoring and strategic planning remain essential for maintaining and improving the financial health of pension plans in Canada.
The index, which projects financial data for Normandin Beaudry’s Canadian clients (excluding Quebec’s municipal and university sectors), bases its asset projections on market index performance and liability projections on estimated discount rates, reflecting each plan’s asset allocation and sensitivity to changes in Government of Canada bond interest rates.